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Numerous empirical studies have sought to identify how differences in the incentives facing managers of nonprofit and for-profit firms lead to differences in economic performance. This chapter focuses on a largely neglected aspect of performance—rapidity of exit—where differences in behavior between nonprofit and for-profit hospitals seem likely to be unusually pronounced, and where those differences may have important implications for the overall structure and performance of the industry. Managers of for-profit hospitals and, to a lesser degree, managers of public hospitals and of...

Numerous empirical studies have sought to identify how differences in the incentives facing managers of nonprofit and for-profit firms lead to differences in economic performance. This chapter focuses on a largely neglected aspect of performance—rapidity of exit—where differences in behavior between nonprofit and for-profit hospitals seem likely to be unusually pronounced, and where those differences may have important implications for the overall structure and performance of the industry. Managers of for-profit hospitals and, to a lesser degree, managers of public hospitals and of religiously affiliated nonprofit hospitals, may have incentives to minimize costs of service and hence to eliminate unused or underused capacity. Managers of unaffiliated nonprofit institutions, in contrast, may not feel such an incentive so long as net cash flow does not become negative. Consequently, it is a plausible hypothesis that such nonprofit hospitals adjust capacity much more slowly than do for-profit firms in response to reductions in demand, effectively serving as capital traps. The results presented here provide strong support for that hypothesis. For-profit hospitals are the most responsive to reductions in demand, followed in turn by public and religiously affiliated nonprofit hospitals, while secular nonprofits are distinctly the least responsive of the four ownership types.